Demand and Supply Applications

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Chapter

4
CHAPTER 4: Demand and Supply Applications

Demand and Supply Applications

4
Chapter Outline
The Price System: Rationing and Allocating Resources Price Rationing Constraints on the Market and Alternative Rationing Mechanisms Prices and the Allocation of Resources Price Floors Supply and Demand Analysis: An Oil Import Fee Supply and Demand and Market Efficiency Consumer Surplus Producer Surplus Competitive Markets Maximize the Sum of Producer and Consumer Surplus Potential Causes of Deadweight Loss from Under- and Overproduction Looking Ahead

Demand and Supply Applications

Prepared by:

Fernando & Yvonn Quijano

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES

THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES
PRICE RATIONING

CHAPTER 4: Demand and Supply Applications

price rationing The process by which the market system allocates goods and services to consumers when quantity demanded exceeds quantity supplied.

CHAPTER 4: Demand and Supply Applications

FIGURE 4.1 The Market for Lobsters
© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 3 of 23 © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 4 of 23

THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES

THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES

CHAPTER 4: Demand and Supply Applications

When supply is fixed or something for sale is unique, its price is demand determined. Price is what the highest bidder is willing to pay. In 2004, the highest bidder was willing to pay $104.1 million for Picasso’s Boy with a Pipe.

The adjustment of price is the rationing mechanism in free markets. Price rationing means that whenever there is a need to ration a good—that is, when a shortage exists—in a free market, the price of the good will rise until quantity supplied equals quantity demanded— that is, until the market clears. © 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair 5 of 23

CHAPTER 4: Demand and Supply Applications

FIGURE 4.2 Market for a Rare Painting
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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES
CONSTRAINTS ON THE MARKET AND ALTERNATIVE RATIONING MECHANISMS On occasion, both governments and private firms decide to use some mechanism other than the market system to ration an item for which there is excess demand at the current price. Regardless of the rationale, two things are clear: 1. Attempts to bypass price rationing in the market and to use alternative rationing devices are much more difficult and costly than they would seem at first glance. 2. Very often, such attempts distribute costs and benefits among households in unintended ways.

THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES
Oil, Gasoline, and OPEC

CHAPTER 4: Demand and Supply Applications

CHAPTER 4: Demand and Supply Applications

price ceiling A maximum price that sellers may charge for a good, usually set by government.

FIGURE 4.3 Excess Demand (Shortage) Created by a Price Ceiling

© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

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© 2007 Prentice Hall Business Publishing Principles of Economics 8e by Case and Fair

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THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES

THE PRICE SYSTEM: RATIONING AND ALLOCATING RESOURCES

CHAPTER 4: Demand and Supply Applications

queuing Waiting in line as a means of distributing goods and services: a nonprice rationing mechanism. favored customers Those who receive special treatment from dealers during situations of excess demand.

CHAPTER 4: Demand and Supply Applications

ration coupons Tickets or coupons that...
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